D. Deverl Maserang; President, CEO & Non-Independent Director; Farmer Bros. Co.
John E. Moore; VP & Head of Coffee; Farmer Bros. Co.
Scott R. Drake; CFO; Farmer Bros. Co.
Hello, good afternoon, and welcome to the Farmer Brothers Fiscal Fourth Quarter and Full Year 2023 Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded.
Earlier today, the company issued its quarterly shareholder letter available on the Investor Relations section of Farmer Bros.' website at farmerbros.com. The shareholder letter is also included as an exhibit on the company's Form 8-K and is available on the company's website and the Securities and Exchange Commission's website at sec.gov.
A replay is available on the company's website and the Securities and Exchange Commission website at sec.gov.
A replay of this audio-only webcast will be available approximately 2 hours after the conclusion of this call. The link to the audio replay will also be available on the company's website.
Before we begin the call, please note all of the financial information presented is unaudited and various remarks made by management during this call about the company's future expectations, plans and prospects may constitute forward-looking statements for purposes of the safe harbor provisions under the federal securities laws and regulations. These forward-looking statements represent the company's views only as of today and should not be relied upon as representing the company's views as of any subsequent date.
Results could differ materially from those forward-looking statements. Additional information on factors which could cause actual results and other events to differ materially from those forward-looking statements is available in the company's shareholder letter and public filings.
On today's call, management will also reference certain non-GAAP financial measures including adjusted EBITDA and adjusted EBITDA margin in assessing the company's operating performance. Reconciliation of these non-GAAP financial measures to their most directly comparable GAAP measures is also included in the company's shareholders letter.
I will now turn the call over to Farmer Brothers Chief Executive Officer, Deverl Maserang. Mr. Maserang, please go ahead.
D. Deverl Maserang
Thank you, operator, and thank you, everyone, for joining us this afternoon. Hopefully, you've had a chance to look at the shareholder letter we filed earlier today.
We've had several significant news announcements these last few weeks, and we want to take some time here to walk you through those and make introductions to our new interim CEO, John Moore; and Interim CFO, Brad Bollner. Most importantly, we want our investors to come out of today's call with a good sense of the company's positioning over the next several quarters and for the long term. Scott, the Board and I fully believe Farmer Brothers has a bright future in front of it.
The sale of our direct ship business was a transformative moment in Farmer Brother's history and creates a significant inflection point for our shareholders. It trains our full focus on what we do best as a company, it strengthens our balance sheet and best positions us to unlock the company's full margin expansion and growth potential.
We already hit the ground running, showing rapidly improving margins in our DSD business. In May, we began rolling out our AI-based pricing model, which uses more than 200 data points from more than 40,000 customers to facilitate dynamic pricing adjustments.
In the last weeks of the quarter alone, we saw several hundred basis point improvements in gross margins. We really are excited about this capability. As we noted in our letter, DSD's stand-alone gross margins historically have run above 40% even without sophisticated pricing capabilities. Since the closing of our direct ship transaction, several important steps have been taken to position the company for what we believe will be an accelerated return to positive free cash flow.
First, we used $100 million in transaction proceeds to pay down outstanding debt and increase our balance sheet flexibility. This allows the team to focus on execution, improving margins and driving strategic growth in our continuing DSD operations.
Second, we underwent a significant reorganization within DSD, which allows us to apply 100% focus to this important business. We introduced a new field organization structure which will drive a more sales and profit centric approach to account management, and we've improved accountability and reporting throughout this organization to better align with our goals and priorities.
We have also taken steps to lower product costs, locking in COGS gains, which will benefit performance throughout the year, and we are optimizing operations across the board, including inventory management, procurement and manufacturing. We continue to elevate opportunities and implement changes to adjust our cost structure to align with our now smaller and leaner organization.
Finally, we are ramping up new growth initiatives. Our REVIVE business is performing well, growing revenue by 50% on a year-on-year basis in fiscal '23. Our launch of SHOTT branded syrup concentrate has also gone well, especially on the West Coast, and we're excited about our ambient liquid coffee program offered under our Boyd's brand. This is in test markets ahead of the broader launch expected in the fall. We are confident its innovative proprietary design will allow us to capture significant market share in a critical segment for our customers.
Now to discuss what the company will be focused on in fiscal 2024, let me introduce you to our interim CEO, John Moore. John joined us earlier this year as Vice President and Head of Coffee. He's a proven industry leader with more than 30 years of experience and one of the most knowledgeable people I know in the coffee industry. He will do an outstanding job leading Farmer Brothers through this management transition.
John E. Moore
Thanks, Deverl, and hello, everyone. One of the reasons I joined Farmer Brothers back in May was the groundwork, which has been laid for future growth and profitability.
Speaking from an industry perspective, the last several years have been among the most challenging I've ever seen across the coffee business. Farmer Brothers has participated and have been impacted by those challenges, but the opportunity is apparent. Beneath the hood, significant operational and financial work has been done, which we're now ready to capitalize on as industry conditions become more favorable.
I want to make some points to amplify and build on Deverl's previous comments. First, our margins are already improving and are set to continue to do so throughout this year. That's not just because we're getting better at pricing, it's also because we're entering a softer coffee market. Toward the end of the past fiscal year, we've seen a notable shift from bullish to bearish in arabicas. Macroeconomic conditions, optimal weather in growing regions and a strong forecasted '23, '24 Arabica harvest in Brazil, are providing downward momentum in arabica prices.
As this trend is forecast to continue, we look to opportunistically participate and further optimize margins going forward. In short, the market we're moving into is one in which Farmer Brothers historically has thrived with our full focus on DSD now, we have visibly improved our performance.
Second, the changes executed in the DSD business are meaningful. Farmer Brothers has been around a long time, so operational changes sometimes take more work than you would think. They require cultural change, too. It's a way of doing business where we need to maintain the strong relationship-driven approach our brand is known for while increasing discipline and accountability throughout the organization. I feel good about the changes and believe we have an energized and talented team to execute.
Finally, our goal is sustainable, profitable growth. We're already better at pricing and getting much more efficient. In addition, as we leverage our revitalized and optimized nationwide network with new products such as Revive, SHOTT and Boyd's ambient liquid coffee, we see exciting sales leverage opportunities, which can enhance cash flows over time. I look forward to speaking with many of you in the near future.
And with that, I'll turn it over to Scott. Scott?
Scott R. Drake
Thank you, John. I will cover our results for the quarter in the year. As we are in the midst of a transition, we won't be introducing specific guidance today, but our interim CFO, Brad Bollner, will provide some color on how we see the business unfolding this fiscal year.
Before diving into the performance, I want to remind you we're reporting on a continuing operations basis, reflecting our DSD business. In July, we filed pro forma financial statements to give investors a view of the impacts of the direct shift divestiture on Farmer Brothers Financials.
As a headline comment, what you see in the fourth quarter are the beginnings of positive pricing impacts on sales, improving margins as we gain pricing leverage and good cost containment. Our net sales increased 1% on a year-over-year basis to $85.5 million. The comparison reflects stronger pricing in the fiscal 2023 4th quarter, offset by lower volumes.
A gross margin of 32.5% was a decrease from 42.6% a year ago, reflecting inflationary impacts and our focus on working down inventory of higher-priced coffee bought in previous quarters. We see this latter impact subsiding, however, as we move through the year.
The year ago gross margin is a more normalized margin for DSD, and we fully anticipate returning to those levels. As Deverl highlighted, what you won't see in the fourth quarter gross margin is that we picked up several hundred basis points in the second half of the quarter as we implemented the AI pricing engine. This will be a tailwind for us as we advance.
Against the backdrop of high inflation, operating expenses were only up 3%, which was primarily due to higher selling expenses. Overall, general and administrative expenses were down 9% during the quarter as we optimized our cost structure. Our adjusted EBITDA loss in the fourth quarter was $7.2 million against the $7.1 million profit last year. This swing primarily reflects lower gross profit flowing through the P&L.
Recapping the year quickly, total revenue was $340 million, up 8% on pricing, but somewhat offset by lower volume. Those pricing benefits showed up in mid- to late fourth quarter, Margins were pressured over the year due to an unfavorable price of coffee and inflationary impacts on labor and other costs in our cost of goods sold. We were able to mitigate some of this impact with operating cost reductions, bringing our G&A down by 13%, but adjusted EBITDA for the year moved to a loss of $14.2 million.
Looking at the balance sheet. We ended the year with $5.2 million in cash and equivalents. Our liquidity position has improved overall, however, as we applied the proceeds from the direct ship sales transaction to reduce our revolving credit facility balance. On June 30, 2023, we had outstanding borrowings under our credit facility of $23 million, utilized $4 million of the letters of credit sublimit under the credited facility and had $35.8 million of availability under our credit facility. We believe we are adequately capitalized to finance our operations in fiscal 2024 as we progress towards our target of positive free cash flow by the end of the fiscal year.
With that, let me introduce our Interim CFO, Brad Bollner, Brad?
Thanks, Scott, and hello, everyone. I'd also like to express my gratitude to Deverl and Scott for their leadership and echo my excitement about where we're going. To provide some color on how we see the business unfolding in fiscal 2024, we're anticipating flattish sales quarter-over-quarter in the first quarter of 2024 with some gross margin improvement as we benefit from favorable pricing.
The bottom line, however, is we will show transitional impacts from 2 factors throughout the year: Our DSD reorganization and the expiration of our co-manufacturing and transition services agreement with TreeHouse. We expect to gain significant production and operating efficiencies resulting from this transition, generating favorable impact to results over the next couple of quarters, with the full advantage starting to appear on a run rate basis as we exit the year. We also expect to see improvement in sales and margin as the year progresses and assuming favorable industry pricing continues we believe we can inflect a free cash flow positive looking several quarters out.
With that, I'll turn it back to Deverl.
D. Deverl Maserang
Thanks, John and Brad, and thank you, Scott, for your hard work and leadership over the last several years. I note we both remain strong believers in the future of this organization and as shareholders are excited about the opportunities that lie ahead. I'm confident this team can execute and I believe the organization is aligned on what it needs to be done to drive success and create long-term shareholder value. Thank you for your continued support of Farmer Brothers.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.